SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
Quarter Ended August 31, 1997
Commission File Number 33-24483-NY
HEALTH-PAK, INC.
(Exact name of Registrant as specified in its Charter)
Delaware 11-2914841
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1208 Broad Street, Utica, NY 13501
(Address of principal executive offices) (Zip Code)
Same
(Former Address) (Zip Code)
(315) 724-8370
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number os Shares outstanding of each of the Issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 31, 1997
Common stock, $0.002 par value 15,490,009
<PAGE>
INDEX
Part I. Financial information
Item 1. Condensed consolidated financial statements:
Balance sheet as of August 31, 1997 and
May 31, 1997 F-2
Statement of income for three months ended
August 31, 1997 and 1996 F-3
Statement of cash flows for three months
ended August 31, 1997 and 1996 F-4
Notes to condensed consolidated financial
statements F-5-13
Item 2. Management's discussion and analysis of
financial condition
Part II. Other information
Signatures
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET - AUGUST 31, 1997 AND MAY 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
ASSETS LIABILITIES
August 31, May 31, August 31, May 31,
1997 1997 1997 1997
Current assets: Current liabilities:
Cash$ 263,048 $ 233,330 Current portion of long-term debt $ 16,232 $ 16,896
Receivables, trade, net of Notes payable, bank 613,962 552,952
allowance of $2,000 468,410 455,376 Accounts payable 1,113,516 1,038,686
Inventory 1,517,811 1,456,990 Payroll and sales tax payable and
Note receivable 89,039 89,039 accrued expenses 56,021 84,503
Prepaid expenses 98,409 100,649
Prepaid consulting fees 3,889 5,556
Total current assets 2,440,606 2,340,940 Total current liabilities 1,799,731 1,693,037
Property and equipment:
Machinery and equipment 310,797 310,797 Long-term debt, net of current
Leasehold improvements 116,555 107,460 portion 21,203 24,885
Office equipment 99,860 99,860
Automotive equipment 21,021 21,021
548,233 539,138
Less accumulated depreciation 221,929 209,476 Commitments
326,304 329,662
Minority interest in consolidated subsidiary 67,660 62,030
Other assets:
Investments in affiliated Company 135,027 130,637 Shareholders' equity:
Deposit on building 32,647 28,400 Common stock, .001 par value 2,000,000
Security deposits 2,372 5,241 shares authorized
Deferred loan acquisition fees Common stock, .002 par value 20,000,000
and costs 14,647 18,224 shares authorized 30,980 30,980
Deferred offering expenses 99,530 99,530 Common stock purchase warrants:
Deferred income taxes 83,115 83,115 Class A
Cash surrender value, officers' Class B
life insurance 26,760 26,760 Class C
Officer's loan 1,200 1,200 Additional paid in capital 2,304,334 2,304,334
Deficit ( 1,061,700) ( 1,051,557)
395,298 393,107 1,273,614 1,283,757
$3,162,208 $3,063,709 $3,162,208 $3,063,709
========== ========== ========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
F-2
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS ENDED AUGUST 31, 1997 AND 1996
1997 1996
---- ----
Net sales $1,013,506 $ 398,078
Cost of sales 737,312 290,112
---------- ----------
Gross profit 276,194 107,966
Selling, general and administrative
expenses 250,363 106,650
---------- ----------
Income from operations 25,831 1,316
---------- ----------
Other charges:
Gain on investments ( 4,390) 5,763
Interest expense 33,067 6,950
Amortization 1,667 1,667
---------- ----------
30,344 14,380
---------- ----------
Loss before income taxes and minority interest ( 4,513) ( 13,064)
---------- ----------
Income taxes:
Current ( 3,266)
----------
Minority interest in loss of consolidated
subsidiary ( 5,630)
----------
Net loss ($ 10,143) ($ 9,798)
========== ==========
Earnings per common and dilutive common equivalent share:
Primary $ 0.00 $ 0.00
========== ==========
Fully diluted $ 0.00 $ 0.00
========== ==========
Weighted average number of common shares and dilutive outstanding:
Primary 14,016,238 17,090,159
========== ==========
Fully diluted 14,016,238 17,090,159
========== ==========
See notes to condensed consolidated financial statements.
F-3
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED AUGUST 31, 1997 AND 1996
<TABLE>
<CAPTION>
<S> <C> <C>
1997 1996
---- ----
Operating activities:
Net loss ($ 10,143) ($ 9,798)
Adjustments to reconcile net loss to cash provided by
operating activities:
Depreciation 12,453 9,440
Amortization 1,667 10,246
Gain on investment in consolidated subsidiary ( 4,390) 5,763
Changes in operating assets and liabilities:
Accounts receivable ( 13,034) 16,061
Inventory ( 55,191) ( 24,502)
Deposits and loan fees 2,197
Prepaid expenses and other receivables 2,240 ( 2,366)
Accounts payable 74,830 9,525
Accrued expenses ( 28,480) 7,027
Deferred income taxes ( 6,322)
-------- --------
Net cash provided from (used in) operating activities ( 17,851) 15,074
-------- --------
Investing activities:
Purchase of property and equipment ( 9,095) ( 24,420)
Increase in other assets ( 291)
-------- --------
Net cash used in investing activities ( 9,095) ( 24,711)
-------- --------
Financing activities:
Proceeds from issuance of common stock 35,000
Proceeds from notes payable, bank 65,051
Proceeds from loan 17,236
Payment of notes payable, bank ( 4,041) ( 2,695)
Payment of long-term debt ( 4,346) ( 5,662)
Payment of deferred offering expenses ( 35,000)
-------- --------
Net cash provided from financing activities 56,664 8,879
-------- --------
Net increase (decrease) in cash 29,718 ( 758)
Cash, beginning of period 233,330 1,376
-------- --------
Cash, end of period $263,048 $ 618
======== ========
Supplemental disclosures and cash flow information: Cash paid during the year
for:
Interest $ 32,422 $ 6,950
======== ========
Income taxes $ 0 $ 0
======== ========
Supplemental schedule of non-cash investing and financing activities:
Issuance of common stock for equity interest
in Silver Lake Holding, Ltd. $ 0 $136,400
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
F-4
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization of the company:
The Company originally "Morgan Windsor Ltd," was incorporated in the State
of Delaware on December 28, 1987 as a "blind pool". The only operations of the
Company at that time were to structure a public offering of its securities.
Thereafter the company began to search for a viable business opportunity.
On May 15, 1989, the Registration Statement containing the Company's
original prospectus was declared effective by the Securities Exchange
Commission. Pursuant to the original prospectus the Company was offering up to
4,000,000 units, at $.10 per unit, each consisting of one share of common stock,
one Class A warrant and one Class B warrant. No securities were sold pursuant to
original prospectus.
The Company subsequently amended its public offering to consist of a
minimum of 15,000 units to a maximum 50,000 units to be offered at $6.00 per
unit. Each unit consists of six shares of common stock (.002 par value) and
eighteen Class A redeemable common stock purchase warrants and twelve B
redeemable common stock purchase warrants. On September 7, 1990, the Company
sold 16,358 units receiving gross proceeds of 98,148. Between October and
November of 1989 the Company repurchased an aggregate of 178,583 shares of the
Company from nineteen stockholders for an aggregate price paid for these shares.
As a result of the above transactions as of April 30, 1991, the date of
acquisition of Health-Pak, Inc, the Company had outstanding shares of 387,648 to
the public.
On April 30, 1991, the Company acquired 100% of the issued and outstanding
capital stock of Health-Pak, Inc, a New York corporation, in exchange for
4,996,352 shares of which 4,756,077 shares were exchanged for 97.54% of the
outstanding shares of Health-Pak, Inc. and 240,275 shares were retained to
acquire the remaining outstanding shares of Health-Pak, Inc
Thereafter, the Company, "Morgan Windsor, Inc." changed its name to
"Health-Pak, Inc" and increased its authorized capitalization to 20,000,000
shares.
2. Nature of business:
Health-Pak, Inc. is a manufacturer and distributor of disposable paper
products for use in serviced-related industries, primarily the medical and
hospital industry. The industry is highly competitive and is serviced by several
large national and multi-national companies with greater financial resources in
comparison to the financial resources available to the Company. There is no
guarantee that this market will continue to develop since the incorporation of
government intervention, economic conditions and other unforeseen situations may
occur.
The Company maintains manufacturing facilities in upstate New York, Mexico
and to a lesser extent Haiti. In addition to paper goods, the Company also
manufactures a sporting goods accessory item, sales of which were minimal for
the three months ended August 31, 1997. The Company's sales are spread
throughout the United States.
F-5
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of significant accounting policies:
Principles of organization:
The acquisition of the Company's subsidiary on April 22, 1991 has been
accounted for as a reverse purchase of the assets and liabilities of the Company
by Morgan Windsor Ltd. Accordingly, the consolidated financial statements
represent assets, liabilities and operations of Health-Pak, Inc. prior to April
30, 1991 and the combined assets, liabilities, and operations for the ensuing
period. The financial statements reflect the purchase of the stock of Morgan
Windsor Ltd. by Health-Pak, Inc., the value being the historical cost of the
assets acquired. All significant intercompany profits and losses from
transactions have been eliminated. Pursuant to the purchase the Company's
387,648 shares were issued to the public for $60,000.
Revenue recognition:
The Company maintains its books and records on the accrual basis of
accounting, recognizing revenue when goods are shipped and expenses when they
are incurred.
Inventories:
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out method (FIFO).
Property and equipment:
Property and equipment are stated at cost. Depreciation of property and
equipment is provided using the straight line method over the following
useful lives:
Years
Machinery and equipment 10
Leasehold improvements 19, 31-1/2 and 39
Automotive equipment 5
Office equipment 10
Expenditures for major renewals and betterments that extend the useful
lives of the property and equipment are capitalized. Expenditures for
maintenance and repairs are charged to expense as incurred.
Per share amounts:
Net earnings per share are computed by dividing net earnings by the
weighted average number of shares of common stock outstanding during the period.
Fully diluted and primary earnings per common share are the same amounts for the
period presented.
Cash and cash equivalents:
For purposes of the statement of cash flows, cash equivalents include time
deposits, certificates of deposit, and all highly liquid debt instruments with
original maturities of three months or less.
F-6
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of significant accounting policies (continued):
Principles of consolidation:
The accompanying consolidated financial statements also include the
accounts of the Company and its 65% owned subsidiary, Protective Disposal
Apparel, LLC. Inter-company transactions and balances have been eliminated in
consolidation (see Note 5).
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results differ from these estimates.
Effect of recently issued accounting standards:
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impaired of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. "SFAS" No. 121
requires that Long-Lived Assets and certain identifiable intangibles to be held
and used by the Company be reviewed for impairment whenever events indicated
that the carrying amount of an asset may not be recoverable. The Company has no
impaired assets at August 31, 1997.
The Accounting Standards Board issued Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock Based Compensation". The
effective date of SFAS No. 123 is for fiscal years beginning after December 15,
1995, and established a method of accounting for stock compensation plans based
on fair value. The Company does not believe that SFAS No. 123 will have an
impact on its financial statements. The Company has not adopted SFAS No. 123 at
August 31, 1997 and continues to use APB 25 which accounts for stock
compensation at the intrinsic value.
Investments:
Investments in certain less than 20% owned companies are carried at cost
and are accounted for on the equity method. The investment account is adjusted
for the Company's proportionate share of their undistributed earnings or losses.
Because the Company exercises significant influence over the investees'
operating and financial activities, management has considered the equity method
of accounting as proper.
4. Inventories:
Inventories consist of:
August 31 May 31
1997 1997
Raw materials $ 941,043 $ 432,771
Finished goods 576,768 1,024,219
---------- ----------
$1,517,811 $1,456,990
========== ==========
F-7
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. Investment:
A) The Company purchased a 10% equity interest in Silver Lake
Corporation in exchange for its own common stock valued at $.682
per share. This investment is accounted for under the equity
method of accounting with a fair value of the stock contributed of
$136,400. Health Pak, Inc., being a significant influence over the
operations and finance of the joint ventures activities with
Silver Lake Corporation, has elected to use the equity method of
accounting for the investment.
B) In October 1996, the Company formed and purchased a 65% equity
interest in Protective Disposable Apparel Co., LLC, a company
operating in the disposable apparel business. Protective Disposal
Apparel Co., LLC in turn purchased a continuing business, Scherer
Healthcare, Ltd, d/b/a Protective Disposal Apparel. As of October
28, 1996 the balance sheet of the entity to be acquired just prior
to the purchase was as follows:
ASSETS
Current assets:
Accounts receivable $263,371
Inventory 308,469
Total current assets 571,840
Security deposits 1,500
Total assets $573,340
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable $318,943
Total current liabilities 318,943
Members' capital 254,397
Total liabilities and members' equity $573,340
F-8
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. Note receivable:
The Company is due $89,039 from the minority interest owner of its
subsidiary, Protective Disposable Apparel Co., LLC. This amount represents the
subsidiary portion of the purchase cost of the business which the Company paid
on behalf of the minority shareholder. The note receivable is non-interest
bearing, unsecured and indefinite in maturity.
7. Line of credit:
The Company has at its disposal a line of credit at Marine Midland Bank.
The note is due on demand and carries interest at prime + 1.5%. Inventory and
accounts receivable are pledged as security. The note is also secured by the
personal guarantees of Anthony Liberatore and Alfred Zennamo to the extent of
$50,000 in total. As of August 31, 1997 the balance due on the line of credit
was $61,967.
The Company opened a line of credit with Foothill Capital Corporation in
September 1996. The loan ceiling amount is based on a percentage formula of
eligible accounts receivable and inventory. The balance due at August 31, 1997
was $551,995.
8. Long-term debt:
Rate Amount Maturity
Note payable, Key Credit (a) 12% $ 1,051 May, 1998
Note payable, Manifest Group (b) 10% 17,220 July, 1999
Note payable, Waste Mgmt. of N.Y. (c) 10% 4,615 November, 1998
Note payable, Business Services, Co. (d) 10% 626 January, 1998
Note payable, Resource Capital Corp. (e) 10% 4,650 March, 2000
Note payable, Resource Capital Corp. (f) 10% 3,416 July, 1999
Note payable, Resource Capital Corp. (g) 10% 5,857 April, 1998
-------
37,435
Less current portion 16,232
------
$21,203
=======
(a) Note payable is collateralized by equipment with a cost of
$5,690. The note is payable in installments of $241 per month,
including interest.
(b) Note payable is collateralized by equipment with a cost of
$20,064. The note is payable in installments of $492 per month
including interest.
F-9
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8. Long-term debt (continued):
(c) Note payable is collateralized by equipment with a cost of
$11,923. The note is payable in installments of $240 per month
including interest.
(d) Note payable is collateralized by equipment with a cost of
$7,688. The note is payable in installments of $199 per month
including interest.
(e) Note payable is collateralized by equipment with a cost of
$6,796. The note is payable in installments of $170 per month
including interest.
(f) Note payable is collateralized by equipment with a cost of
$5,296. The note is payable in installments of $155 per month
including interest.
(g) Note payable is collateralized by equipment with a cost of
$9,053. The note is payable in installments of $251 per month
including interest.
Maturities of long-term debt as of August 31, 1997 are as follows:
Year Amount
May 31, 1998 $16,232
May 31, 1999 14,302
May 31, 2000 6,901
-------
$37,435
9. Commitments:
Commencing August 1, 1993, the Company entered into a lease agreement with
the Utica Industrial Development Corporation for manufacturing and office
space of approximately 43,500 square feet. The initial term of the lease
was from August 1, 1993 to April 30, 1994 at a monthly rental of $7,500.
The Company had an option to purchase the facility for $600,000 which
expired on April 30, 1994. The purchase was not completed by April 30,
1994, and the lease was automatically extended for an additional three
year period at the same terms and rental. Rent expense was $22,500 for the
three months ended August 31, 1997 and $28,500 for the three months ended
August 31, 1996.
The Company is currently renegotiating to purchase the facility for the
original asking price of $600,000. Rental of the building is currently on
a month to month basis at the rate of $7,500 per month. Should the
purchase of the building be consummated, approximately $50,000 of the past
rent will go toward the purchase price if the down payment on the revised
purchase agreement is paid within a specified time frame.
F-10
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9. Commitments (continued):
Consultant contracts:
The Company entered into a three year investment banking consulting
agreement on December 31, 1994. The Company issued 1,000,000 shares of
$.002 par common shares and used a discount valuation of $.002 per share.
The consultant is to act as a placement agent for Health-Pak, Inc. on all
private placements or secondary offerings. Services commenced as of April
1, 1995. The agreement is being amortized over thirty six months.
In addition, the Company also issued 4,500,000 stock options at various
exercised prices. As of May 31, 1997, 2,748,047 options have been exercised
as follows:
Number of options Exercise price
600,000 .10
233,333 .15
1,914,714 .26
The Company entered into a public relations consulting agreement on March
10, 1995. The agreement has a thirty month term and services commenced on
June 11, 1995. The Company issued 1,750,000 shares of $.002 par per common
shares plus an additional 17,242 shares of the original agreement that in
addition to the 1,750,000 shares, 250,000 shares are to be issued at a
rate of 8,621 shares per month over the next twenty nine months. A
valuation of $.02 per share was used. The Company withdrew from the
consulting agreement in August and no other shares were issued. In
addition, advances made to the Company and on the books as a notes
payable, other, were reclassified as payment for common stock already
issued.
10. Income taxes:
Effective June 1, 1993, the Company has adopted the Statements of
Financial Accounting Standards No. 109 ("SFAS No. 109"), Accounting for
Income Taxes," which applies a balance sheet approach to income tax
accounting. The new standard required the Company to reflect on its
balance sheet the anticipated tax impact of future taxable income or
deductions implicit in the balance sheet in the form of temporary
differences. The Company has reflected certain future tax benefits on its
balance sheet from the realization of the carryover of the current years
net operating loss to anticipated future earnings. The cumulative effect
as of June 1, 1993, the date of the adoption of SFAS No. 109, was
immaterial. As permitted by SFAS No. 109, prior year's financial
statements have not been restated.
F-11
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10. Income taxes (continued):
The components of deferred tax assets and liabilities are as follows:
Deferred tax assets:
Bad debt allowances $ 500
Net operating loss carryfoward 114,115
114,615
Deferred tax liability:
Depreciation 900
Deferred tax asset 113,715
Valuation allowance 30,600
Net deferred tax asset $ 83,115
========
As of August 31, 1997, the Company has available, for tax reporting
purposes, net operating loss carryovers of approximately $647,600 which
expire through 2011.
11. Employment contracts:
The Company has no employment contracts. Further, it has no retirement,
pension or profit sharing plan covering its officers or directors.
12. Deferred offering expense:
The value stated is the amount that has been paid by the Company for
expenses incurred for the public offering of warrants. The deferred
offering expenses on the issued or expired warrants have been deducted
from the proceeds of the offering. The offering of the Class C warrants
is expected to be completed in 1997. In the event the offering does not
take effect, the deferred offering expenses will be charged to operating
expenses.
All deferred offering expense pertain to the Class C warrants which had
not been issued as of the statement date.
F-12
<PAGE>
HEALTH-PAK, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
13. Related party transactions:
Officers loans are unsecured and non-interest bearing. Officers have
indicated that they will not be repaid in the current year. In addition,
the Company has advanced funds to its minority interest partner, Protective
Disposal Apparel, in the amount of $89,039.
14. Common stock purchase options:
As of August 31, 1997 the unexercised options held by Silver Lake, Inc.
are as follows:
Amount of options Exercise price Expiration
500,000 .75 October 31, 1998
600,150 1.25 October 31, 1998
500,000 2.00 October 31, 1998
The Company has elected to continue use of the methods of accounting
described by APB-25 "Accounting for Stock Issued to Employees" which is
based on the intrinsic value of equity instruments and has not adopted
the principles of SFAS-123 "Accounting for Stock Based Compensation"
effective for fiscal years beginning after December 15, 1995, which is
based on fair value. There is no significant difference between
compensation cost recognized by APB-25 and the fair value method of
SFAS-123. The Company has not recognized compensation on the granting of
the options and warrants to employees and consultants since the fair
value of the warrants or options is the same as or less than the exercise
price.
15. Earnings per share:
August 31, 1997 August 31, 1996
--------------- ---------------
Primary Primary
Number of shares:
Weighted average shares outstanding 15,490,009 13,649,571
Incremental shares for outstanding
stock options 1,600,150 366,667
---------- ----------
17,090,159 14,016,238
========== ==========
Primary earnings per share amounts are computed based on the weighted
average number of shares actually outstanding. Shares that would be
outstanding assuming exercise of dilutive stock options , all of which are
considered to be common stock equivalents. Fully diluted earnings per
share are the same as primary earnings per share for August 31, 1997 and
August 31, 1996.
F-13
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements.
The following condensed consolidated financial statements have been
prepared by Health-Pak, Inc. (the "Company") pursuant to the rules and
regulations of the Securities and Exchange Commission promulgated under the
Securities Exchange Act of 1934 as amended. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of the Company's
management, the condensed consolidated financial statements include all
adjustments (consisting only of adjustments of a normal, recurring nature)
necessary to present fairly the financial information set forth therein.
Operating results for the three month period ended August 31, 1997 are not
necessarily indicative of the results that may be expected for the year ending
May 31, 1998.
These condensed consolidated financial statements should be read in
conjunction with the financial statements and accompanying notes included in
Form 10-KSB for the year ended May 31, 1997.
Condensed Consolidated Financial Statements:
Balance Sheets as of August 31, 1997 .........................F-2
Statement of Income For
Three Months Ended August 31, 1997 and 1996...................F-3
Statement of Cash Flows
For three Months Ended August 31, 1997 and 1996,,,,...........F-4
Notes to Condensed Consolidated Financial Statements..F-5 to F-11
3
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
I. Financial Condition and Liquidity.
Introduction.
As previously stated in the Company's filed reports, the financial
statements and the discussion which follows includes, on a consolidated basis,
the assets, liabilities and operating results for Protective Disposable Apparel
Company, LLC ("PDA") which was acquired by the Company in October, 1996 as a 65%
owned subsidiary. Since adjustments were not made for prior periods, comparisons
may not completely reflect the actual results. Inter company balances have also
been eliminated in the consolidation.
(a) Financial Condition.
Assets:
Total assets increased by $98,499 at August 31, 1997, the end of the
first quarter of fiscal 1998, when compared to the year end at May 31, 1997, an
increase of approximately 3.2%, which reflects a much slower growth rate in
terms of total assets than has been reported for previous periods. This is an
indication of the fact that the Company's recent expansion period with the
addition of the PDA acquisition has now settled. For instance, the Company's
growth in terms of total assets at May 31, 1997 compared to the year ended May
31, 1996 was 190%.
There is also very little change in the composition of assets since May
31, 1997 with cash being $29,718 higher at the end of the first quarter compared
to the year end, receivables are only $13,094 higher than the year end and
inventory being only $60,821 higher than the year end. These increases,
expressed in terms of percentages are 12.7%, 2.9% and 4.2%, respectively, and
are not regarded as significant by management. The increase in cash is slightly
higher this period than the other items because of the Company's recent and
temporary policy of conserving cash for the proposed acquisition of its plant
facility as described in "Management's Discussion and Analysis or Plan of
Operations in the Company's 10-KSB report for the year ended May 31, 1997."
Each of the other individual asset accounts when compared with the
corresponding account for the fiscal year ended May 31, 1997 are quite
comparable and reflect little change in the composition of assets for the
quarterly period ended August 31, 1997.
Liabilities:
There were also no significant changes in liabilities for the period
except for increases in notes payable, bank and accounts payable.
4
<PAGE>
The increase in bank notes payable (an increase of $61,010) for the
period reflects the Company's increase in the use of its credit facility during
the period and the increase of $74,830 in accounts payable is caused by the
Company's continued policy of temporarily conserving cash for a proposed plant
acquisition and some inventory purchases.
None of these changes are regarded as significant by management and
except for the entries mentioned above, the liabilities are very comparable to
the year ended May 31, 1997. This indicates that the Company devoted the first
quarter of fiscal 1998 to consolidation of its acquisition of PDA and
positioning itself to make the building and plant acquisition previously
mentioned.
Liability for payroll taxes decreased in this period as this item was
reduced by payment during the period and was not significantly increased because
of the addition of new employees, as was the case at the fiscal year end.
The additions to liabilities in the first quarter of 1998 represented
by the increases in notes payable and accounts payable are responsible for the
6.3% increase in Total Current Liabilities at August 31, 1997 of approximately
$106,694 compared to the year ended May 31, 1997 ($1,799,731 at August 31, 1997
compared to $1,693,037 at the year ended May 31, 1997). Current Liabilities at
the end of the first quarter were, nevertheless, more than offset by Current
Assets of $2,440,606.
The Company's retained earnings deficit of $1,061,700 for the quarter
ended August 31, 1997 shows an increase in the total deficit of $ 10,143 over
the year ended May 31, 1997 due to a further net loss in the quarter ended
August 31, 1997 of a comparable amount. This loss compares with a net loss of
$89,622 at the year end in 1997 and a net loss of $9,798 at the end of the
comparable quarter at August 31, 1996. See "Results of Operations."
Management believes that, overall, there was no significant change in
the financial condition of the Company in the first quarter of 1998 when
compared to the year end.
See "Results of Operations" for additional information. For information
regarding liquidity, see Subparagraph (b) "Liquidity" below. For additional
information relating to the financial condition of the Company, also see
"Inflation" and "Trends Affecting Liquidity, Capital Resources and Operations."
(b) Liquidity.
Although there was a slight decrease in working capital at the
end of the first quarter of 1998 compared to the year ended
5
<PAGE>
May 31, 1997, the Company had sufficient liquid assets to meet its obligations
at the end of this period. Working capital at August 31, 1997 was $640,875
compared to $647,903 at May 31, 1997, the fiscal year end. This represents a
decrease of only $7,028 or 1.1% when comparing the first quarter of 1998 with
the fiscal year end. This is not a significant change, particularly when taking
into account the expenses that the Company has had in assimilating the business
of PDA, providing inventory for PDA accounts and the establishment of a clean
room facility for the Company, largely to accommodate PDA products.
Principal short-term liabilities at August 31, 1997 were $1,113,516 in
payables, short term note obligations of $613,962, the current portion of long
term debt in the amount of $16,232 and taxes due of $56,021 for a total of
$1,799,731. Against this total, at August 31, 1997, the Company had liquid
current assets of $263,048 in cash, inventory of $1,517,811 and receivables of
$468,410 for a total of $2,249,269 in short term assets. In management's
opinion, these assets were sufficient to cover the Company's operating expenses
and debt for the foreseeable future.
Management also had at its disposal a credit line of $650,000 (an
increase from the previous credit line of $600,000) of which approximately
$50,000 was available at August 31, 1997.
In combination, management believes that the Company will have
sufficient liquidity and adequate working capital and sufficient credit
alternatives to fund the Company's operations during the current fiscal year,
including support for its planned expansion of sales.
The principal source of funds for the Company's operations during the
first quarter of 1998 continued to be from operating revenues and proceeds from
its credit line, as reflected in the Company's financial statements.
II. Results of Operations.
In the first quarter of 1998 the Company had net sales of $1,013,506
compared to net sales of $398,078 for the same period in fiscal 1997. This is an
increase of $615,428 compared to the first quarter of fiscal 1997 or a
percentage increase of approximately 155%.
As previously reported, the substantial increase in revenues when
compared to the prior period results primarily from the acquisition of PDA which
added its revenues to those of the Company. Revenues were also very slightly
influenced by a price increase of 3.5% on all of the Company's products applied
on March 1, 1997. A price increase of 14.7% on all of PDA's products in
6
<PAGE>
July, 1997 was also in effect for part of the quarter ended August 31, 1997 and
increased revenues for that period.
The price increases on PDA products were made as the result of a cost
study conducted by the Company to insure that PDA's pervious costing was in line
with pricing. Management discovered from the study that many of PDA's products
were not correctly priced, which resulted in the price increase as of July 1,
1997. This study took longer than anticipated or the price adjustments would
have been implemented sooner.
Having now "costed" all of PDA's products and having adjusted the
prices accordingly, management believes that improvement will occur in the Cost
of Goods account for the second quarter of the current fiscal year.
During the fiscal year ended May 31, 1997, the Company introduced new
products which are expected by management to make more significant contributions
to revenues in the current fiscal year than in 1997. These new products include
sterile garments used in "clean room" operations in industry, where a germ free
objective is maintained. These products include sterile lab coats, coveralls,
hoods and boots and are a product of the Company's new "clean room" facilities.
The Company also introduced "sonic sealed" garments which are garments
produced by a sonic sealing or welding process, manufactured by ultrasonic
equipment which essentially changes the molecular structure of the material
being made to form a complete and impenetrable seal at the point of closure. No
heat is used or necessary for this process. These garments are fluid and
chemical resistant and are used primarily in chemical and nuclear work.
The Company opened important new customers for its products during
fiscal 1997, including Boeing, Grumman Aircraft, Bristol Meyers, Johnson and
Johnson and Mitsubishi. It is anticipated that serving these customers will
influence revenues in a positive way
during the current year.
The shift, beginning in 1996, to private label work has been
essentially discontinued as the Company assumed additional responsibility for
the manufacture of PDA's products and required additional manufacturing capacity
for its own products.
Under new agreements for manufacturing private label goods with two new
principal customers, the Company will sustain sufficient profits to warrant a
continuation of this work at a reduced rate.
The Company's production of operating gowns did not achieve the results
expected and were essentially discontinued; however, the Company is
manufacturing such gowns presently to the
7
<PAGE>
specifications of a new customer and will continue to offer this product mainly
through the orders received from its customer.
There were no significant contributions to revenues from the sale of
the "Rigg" (a sling designed to hold basketballs, soccer balls and baseballs,
among other things, allowing free use of the hands and arms) a non-medical
product offered for consumer use beginning in 1995, and the Company is still
awaiting marketing efforts of others to see important revenues from this
product.
However, based on the potential of the new products mentioned above,
the new markets opened by the Company and the addition of PDA's sales and
customers, management believes the Company will grow significantly in terms of
net revenues for 1998.
Cost of sales for the quarter ended August 31, 1997 increased when
compared to the quarter ended August 31, 1996 as would be expected from the
significant increase in revenues for the current period. Cost of sales for the
quarter ended August 31, 1997 expressed as a percentage of net sales declined
slightly to 72.7% compared to 72.8% for the quarter ended August 31, 1996, a
difference of only 0.1%. This slight difference shows that the Company is more
in balance in terms of its cost of sales now that price increases have been
implemented and shows improvement over the year ended May 31, 1997, when cost of
sales expressed as a percentage of net sales was 73.4%.
As was previously stated, cost of sales during prior periods increased
as a percentage of net sales because PDA's products were assimilated into the
Company's line of products and these products were generally carried by PDA at a
higher cost basis. The Company corrected this problem by (i) assuming some of
the manufacturing responsibility for PDA's products, and thereby controlling
costs on a better basis; and (ii) increasing the prices for PDA's products to
more accurately reflect costs.
Management now believes that the cost differential has been corrected
by the increase in prices made by the Company in July, 1997, as stated above,
and by manufacturing some of PDA's products in house. Now approximately 50% of
PDA's products are made by the Company.
Gross profits for the first quarter of 1998 were higher by $168,228
than gross profits for the comparable period in 1997 (i.e. $276,194 for the
first quarter ended August 31, 1997 compared to $107,966 for the period ended
August 31, 1996) on increased net sales of $1,013,506 for the quarter compared
to net sales of $398,078 for the same period in 1997. Expressed as a percentage
of net sales, gross profits for the quarter ended August 31, 1997 were 27.2% of
net sales and 27.1% of net sales for the quarter ended August 31, 1996. Gross
profits at the year ended May 31, 1997 were 26.1%. The comparison between the
quarter ended August 31, 1997
8
<PAGE>
and the year ended May 31, 1997 shows a slight improvement in performance
resulting from the price increases earlier in the quarter and assumption of
manufacturing operations for almost 50% of PDA's products. The price increases
were not in effect for the entire period of the first quarter of 1998.
Nevertheless, the obvious increase in net sales for the quarter ended August 31,
1997 compared to the same period ended August 31, 1996 resulted in a significant
increase in gross profits for the most recent quarter.
Selling, general and administrative expenses were 24.7% of net sales
for the first quarter of 1998 compared to 27.1% of net sales for the same period
in fiscal 1997. When examining this comparison it should be noted that in the
quarter ended August 31, 1996, the cost of the Company's factoring charges was
still attributable to this account while in the quarter ended August 31, 1997,
the Company changed its method of financing operations and the interest costs
for this purpose is shown in the interest expense account. Since this cost has
been shifted out of selling, general and administrative expenses this year, the
effect has been to lower this cost in the first quarter of 1998 compared to
August 31, 1996.
Other charges are up for the same reason, i.e. because interest charges
for the Company's credit line are included in the interest account, which is
part of "other charges."
While the Company eliminated its high cost of factoring receivables
during the last fiscal year, financing costs in terms of interest charges for
its present financial accommodation for the quarter were $33,067 compared with
only $6,950 for the quarter ended August 31, 1996.
Net income (loss) for the quarter ended August 31, 1997 was ($10,143)
compared to ($9,798) for the same period ended August 31, 1996 and was ($89,622)
for the year ended May 31, 1997. While the loss for the two quarterly periods is
comparable, it should be noted that gross profits from operations for the
quarter ended August 31, 1997 were considerably higher than gross profits from
operations for the same period at August 31, 1996. Cost factors which affected
profitability in both quarterly periods, however, were the interest costs at
August 31, 1997 and factoring charges (accounted for in higher General and
Administrative costs) in the comparable period ended August 31, 1996.
For information with respect to the possible effect of future trends on
operations, see the discussion under the caption "Trends Affecting Liquidity,
Capital Resources and Operations."
III. Capital Resources.
There was no significant increase in Property and equipment in the
quarter ended August 31, 1997 and there are at present no commitments for
capital purchases except for the Company's proposed
9
<PAGE>
purchase of the building which it presently occupies. The determination to
purchase this building was made for a number of reasons including a favorable
purchase price and because it will be saving money on the difference between
rental payments and mortgage amortization. For this purpose, the Company has
been accumulating cash as was stated above for the down payment.
The Company does not anticipate that this purchase will involve
significant cash demands in excess of the funds already conserved.
The Company also does not presently anticipate the allocation of
significant resources for machinery and equipment purchases. Any such
commitments will be dependent on demand for the delivery of products under new
or increased orders and will primarily be purchased in cooperation with New York
State financing programs, leasing programs or bank financing without committing
substantial cash assets. Future conditions, such as successful equity financing
efforts, may change this position.
The Company constructed a "clean room" to provide the basis
for the sale of sterilized products which is now complete. This
was not a significant cost to the Company.
Current conditions indicate, however, that some funds will be required
for additional capital expenditures in the foreseeable future which coincides
with management's sales expansion program; however, as explained above,
financing for purchasing these resources will be obtained from sources which
will not require a substantial outlay of cash and will be in proportion to the
Company's resources.
IV. Inflation.
Management anticipates that inflation will not have a material effect
on the Company's operations in the future. This is principally due to two
factors. First, if orders increase due to inflation the Company presently has
adequate manufacturing equipment and capacity to support not only its present
level of operations but, with the addition of a second and, if needed, a third
operating shift, to support a substantial increase in production of its present
product lines. Second, although product pricing would be affected by inflation
due to higher costs, management believes that public health and safety concerns
would outweigh any negative impact of price increases and would not adversely
affect the Company's projected sales. Additionally, the hospital and health care
markets have historically been best able to pass on increased costs which are
typically paid by insurance coverage.
10
<PAGE>
V. Trends Affecting Liquidity, Capital Resources and Operations.
A number of factors are expected to impact upon the Company's
liquidity, capital resources and future operations. Included among these are (i)
environmental concerns; (ii) economic factors generally affecting the health
care industry; (iii) governmental regulation of the Company's products and (iv)
the growing concern in many industries about controlling the spread of
infectious disease.
Some disposable products offered by the Company are made from
plastic-based materials which have raised concern among environmental groups
over their proper disposal. Although management believes that such concerns are,
in many cases, valid, it is also believed that these concerns must be balanced
with safety provided by these products against infectious diseases such as AIDS,
hepatitis and others. This belief has recently been reinforced by the new,
comprehensive safety regulations issued by the Occupational Safety and Health
Administration (OSHA) which require extensive new measures to combat the spread
of infection and disease in many industries which had not previously required
such measures. Most importantly, from the point of view of the Company, are the
requirements for protective apparel such as that manufactured by the Company.
Management believes that the regulations, which are now fully implemented, will
increase demand for the Company's products and significantly expand the
Company's markets. Based upon recent increased orders, management believes that
most significant among these new markets for its products will be the hospital
looking to comply with the new OSHA regulations, emergency service industries,
including police, fire and ambulance services, which routinely are exposed to
unusually high risk of infectious diseases and physicians.
Nevertheless, the requirements relating to proper disposal of
plastic-based garments is still in question and the Company cannot predict the
outcome of any future regulations relating to these matters. Any changes in
manufacturing or disposal requirements could result in higher manufacturing
costs and less profitability for the Company or, possibly, complete elimination,
which could have a substantially negative impact on liquidity and capital
resources in the future.
Management also believes that perhaps the most significant adverse
impact upon its liquidity, capital resources and future operations may result
from economic pressures to keep health care costs low. Spearheaded by health
care insurers and now the federal government, the entire health care industry in
the United States has come under increasing pressure and scrutiny to reduce
unnecessary and wasteful costs. To meet the criticism in recent years over the
higher cost of disposable products, the Company has introduced a line of limited
reusable products. These products are designed to be washed and reused from
between 25 and 100 times before being replaced. Management believes that such
products will
11
<PAGE>
not only address the economic concerns but also the environmental issues by
reducing the amount of products which are being discarded. However, as already
mentioned, in situations where there is a high risk of spreading infection,
management believes that the disposable products will continue to have strong
appeal and demand in the marketplace.
As new Company manufactured products, such as the "Rigg," car
covers and sterilized products are introduced, management believes
that sales revenues will increase and, over the long term, will
result in more stable sales and higher profit margins for the Com-
pany. In addition, the existence of the Occupational Safety and
Health Administration (OSHA) regulations are expected to continue
to have a positive influence on the demand for the Company's prod-
ucts.
In short, the above factors may each have a significant impact upon the
Company's future operations. At present, management believes that safety
concerns over the spread of infectious diseases such as AIDS and hepatitis will,
at least for the foreseeable future, outweigh economic and environmental
concerns. Consequently, management does not anticipate any adverse impact upon
its future operations for the foreseeable future. Apart from these factors,
management knows of no trends or demands that would adversely affect the
financial condition of the Company.
12
<PAGE>
PART II OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
11 - Calculation of primary and fully-diluted income (loss) per
share. Reference is made to Note 15 of the financial
statements,
incorporated herein by reference.
(b) Reports on Form 8-KSB
None.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEALTH-PAK, INC.
/s/ Anthony J. Liberatore
Anthony J. Liberatore
President
Chief Operating Officer
Dated: December 12, 1997
/s/ Michael A. Liberatore
Michael A. Liberatore
Vice President
Chief Financial Officer
Dated: December 12, 1997
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEALTH-PAK, INC.
Anthony J. Liberatore
President
Chief Operating Officer
Dated: December 12, 1997
Michael A. Liberatore
Vice President
Chief Financial Officer
Dated: December 12, 1997
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> AUG-31-1997
<EXCHANGE-RATE> 1
<CASH> 263,048
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